Energy market faces possible surprises

Sam Fletcher
Senior Writer

Analysts J. Marshall Adkins and James M. Rollyson, in the Houston office of Raymond James & Associates Inc., recently listed 10 surprises that could upset energy markets this year.

"The probability of any one of these events occurring is relatively low," they acknowledged. However, they said, the market may be "significantly underestimating the likelihood" that at least one might happen.

The analysts divided the possibilities into six bullish and four bearish surprises.

'Bullish' prospects
—US natural gas storage falls below 1 tcf this winter. The consensus among analysts is that US gas storage will be at 1.2-1.6 tcf on Mar. 31. But Adkins and Rollyson said, "On a weather-adjusted basis, we believe the gas markets are now 2 bcfd tighter than last year." Extrapolating that shortage through the winter at normal temperatures, they figure storage will be down to 1 tcf of gas or less. "This would be a big signal that the market is still short gas and very bullish for gas prices and energy stocks," they said.

—A large petroleum-exporting country stops pricing contracts in US dollars. "It is possible that in 2005 someone will make such a decision," the analysts said. "We don't believe either Russia or Saudi Arabia will do it anytime soon, given their desire to maintain good relations with Washington. On the other hand, Iran and Venezuela do not have much to lose in terms of diplomacy; they could afford to make a political statement. Because of the inverse relationship between the dollar and 'hard assets,' dedollarizing the oil market would be bullish for oil prices."

—Russian oil production stagnates or declines instead of slowing as most expect. "Fallout from the Yukos crisis will be a key factor. If foreign investors perceive the country's political risk to be unacceptably high, Russia would lose out on much of the foreign capital that it needs," said the analysts.

—An integrated oil company buys an exploration and production firm for its people rather than its assets. "Historically, the appeal of E&Ps was primarily due to their high-potential assets. But if the shortage of petroleum engineers gets worse, we may see that as a key driver of future [mergers and acquisitions] activity," the analysts said.

—China's demand for oil grows more than expected. "If China were to surprise on the upside and grow its oil demand at 15% for the second consecutive year, that would imply incremental demand of over 300,000 b/d. Continued inflows of foreign capital, combined with the rise of an energy-hungry middle class, could potentially keep Chinese oil demand expanding at double-digit rates at least through the end of this decade," Adkins and Rollyson said.

—There's a major disruption of crude from the Organization of Petroleum Exporting Countries. Despite persistent sabotage in Iraq and attacks in Saudi Arabia, there has been no long-term disruption of global oil supplies. However, the analysts said, "A major attack against the Ras Tanura export complex on the Saudi coast cold halt well over 3 million b/d of exports for many weeks. This same type of attack against the Basra export terminal in Iraq almost succeeded last April. Throw in tensions over Iranian nuclear proliferation and Nigerian civil unrest, and you have a higher probability of supply disruption than many think."

'Bearish' possibilities
—An integrated oil company invests in Iraq. "Assuming the Jan. 30 elections result in an effective government, one or more majors may decide that the opportunity is too good to pass up," said Adkins and Rollyson. "Given Iraq's vast untapped oil potential, an investment below the $1 billion level would not be truly meaningful."

—Petroleos Mexicanos releases several rigs. For the last 3 years, Pemex has been "the largest drain on Gulf of Mexico jack up [rig] supply," the analysts said. "However, nearly half of the jack ups in Mexico have contracts that expire in 2005, which could create a problem for the [gulf] market if Pemex chooses to release many of these rigs."

—High commodity prices melt down the global economy. At $40-50/bbl, the analysts said, "It is very unlikely that oil will be the trigger mechanism for a recession." However, "It is possible that the combined effect of higher-than-planned commodity prices—oil, gas, metals, etc.—could help send the global economy into a tailspin sometime in 2005."

—Nuclear power increases. "With the rising cost of fossil fuels, nuclear power is again being discussed as a viable alternative, with 25 units under construction worldwide and even one company seeking potential permit approval for a US site," the analysts said.

(Online Jan. 17, 2005; author's e-mail:

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